REPORT ON EXAMINATION

OF

PROGRESSIVE EXPRESS INSURANCE COMPANY

RIVERVIEW, FLORIDA

AS OF

DECEMBER 31, 2007

BY THE OFFICE OF INSURANCE REGULATION

TABLE OF CONTENTS LETTER OF TRANSMITTAL ..........................................................................................................-

SCOPE OF EXAMINATION.................................................................................................. 1 STATUS OF ADVERSE FINDINGS FROM PRIOR EXAMINATION ....................................................... 2

HISTORY ............................................................................................................................... 3 GENERAL ..................................................................................................................................... 3 CAPITAL STOCK ........................................................................................................................... 4 PROFITABILITY OF COMPANY ...................................................................................................... 4 DIVIDENDS TO STOCKHOLDERS ................................................................................................... 5 MANAGEMENT............................................................................................................................. 5 CONFLICT OF INTEREST PROCEDURE............................................................................................ 7 CORPORATE RECORDS ................................................................................................................. 7 ACQUISITIONS, MERGERS, DISPOSALS, DISSOLUTIONS, AND PURCHASE OR SALES THROUGH REINSURANCE.............................................................................................................................. 7 SURPLUS DEBENTURES ................................................................................................................ 7

AFFILIATED COMPANIES................................................................................................... 7

ORGANIZATIONAL CHART ................................................................................................ 8 CASH MANAGEMENT AGREEMENT .............................................................................................. 9 INTEREST AGREEMENT ................................................................................................................ 9 INVESTMENT SERVICES AGREEMENT........................................................................................... 9 COST ALLOCATION AGREEMENT ............................................................................................... 10 ALLOCATION OF FEDERAL INCOME TAXES ................................................................................ 10 TAX ALLOCATION AGREEMENT................................................................................................. 11

FIDELITY BOND AND OTHER INSURANCE.................................................................... 11

PENSION, STOCK OWNERSHIP AND INSURANCE PLANS......................................... 11

STATUTORY DEPOSITS.................................................................................................... 12

INSURANCE PRODUCTS.................................................................................................. 12

TERRITORY ................................................................................................................................ 12 TREATMENT OF POLICYHOLDERS............................................................................................... 13

REINSURANCE................................................................................................................... 13 ASSUMED................................................................................................................................... 13 CEDED ....................................................................................................................................... 13

ACCOUNTS AND RECORDS ............................................................................................ 14 CUSTODIAL AGREEMENT ........................................................................................................... 14 INDEPENDENT AUDITOR AGREEMENT........................................................................................ 14 INFORMATION TECHNOLOGY (IT).............................................................................................. 15

FINANCIAL STATEMENTS PER EXAMINATION ............................................................ 15 ASSETS ...................................................................................................................................... 16 LIABILITIES, SURPLUS AND OTHER FUNDS ................................................................................ 17 STATEMENT OF INCOME............................................................................................................. 18

COMMENTS ON FINANCIAL STATEMENTS................................................................... 19 ASSETS ...................................................................................................................................... 19 LIABILITIES................................................................................................................................ 19

COMPARATIVE ANALYSIS OF CHANGES IN SURPLUS.............................................. 20

SUMMARY OF FINDINGS.................................................................................................. 21

CONCLUSION.....................................................................................................................22

April 17, 2009 Kevin M. McCarty Honorable James J. Donelon Commissioner Secretary, Southeastern Zone, NAIC Office of Insurance Regulation Commissioner State of Florida Louisiana Department of Insurance Tallahassee, Florida 32399-0326 1702 N. 3rd Street Baton Roug, Louisiana 70802 Honorable Morris J. Chavez Secretary, Western Zone, (IV), NAIC Department of Insurance State of New Mexico Post Office Box 1269 Santa Fe, NM 87504-1269 Honorable Joel Ario Secretary, Northeastern Zone, (I), NAIC Pennsylvania Insurance Department 1326 Strawberry Square Harrisburg, PA 17120 Honorable Merle D. Scheiber Secretary, Midwestern Zone, (III), NAIC South Dakota Division of Insurance Department of Revenue & Regulation 445 East Capitol Avenue, First Floor Pierre, SD 57501-3185 Dear Sirs and Madam: Pursuant to your instructions, in compliance with Section 624.316, Florida Statutes, and in accordance with the practices and procedures promulgated by the National Association of Insurance Commissioners (NAIC), we have conducted an examination of December 31, 2007, of the financial condition and corporate affairs of:

PROGRESSIVE EXPRESS INSURANCE COMPANY 4030 CRESCENT PARK DRIVE, BLDG. B

RIVERVIEW, FLORIDA 33569

Hereinafter referred to as the “Company”. Such report of examination is herewith respectfully submitted.

1

SCOPE OF EXAMINATION

This examination covered the period of January 1, 2004, through December 31, 2007. The

Company was last examined by representatives of the Florida Office of Insurance Regulation

(Office) as of December 31, 2003. This examination commenced with planning at the Ohio

Department of Insurance. The fieldwork commenced on July 28, 2008, and was concluded on

April 17, 2009.

This financial examination was a coordinated zone exam in conjunction with the Ohio Department

of Insurance (Department) conducted in accordance with the Financial Condition Examiners

Handbook, Accounting Practices and Procedures Manual and annual statement instructions

promulgated by the NAIC as adopted by Rules 69O-137.001(4) and 69O-138.001, Florida

Administrative Code, with due regard to the statutory requirements of the insurance laws and rules

of the State of Florida.

The Financial Condition Examiners Handbook requires that the examination be planned and

performed to evaluate the financial condition and identify prospective risks of the Company by

obtaining information about the Company including corporate governance, identifying and

assessing inherent risks within the Company, and evaluating system controls and procedures

used to mitigate those risks. An examination also includes assessing the principles used and

significant estimates made by management, as well as evaluating the overall financial statement

presentation and management's compliance with Statutory Accounting Principles and annual

statement instructions when applicable to domestic state regulations.

2

In this examination, emphasis was directed to the quality, value and integrity of the statement of

assets and the determination of liabilities, as those balances affect the financial solvency of the

Company as of December 31, 2007. Transactions subsequent to year-end 2007 were reviewed

where relevant and deemed significant to the Company’s financial condition.

All accounts and activities of the Company were considered in accordance with the risk-focused

examination process.

The examination included a review of the corporate records and other selected records deemed

pertinent to the Company’s operations and practices. In addition, the NAIC IRIS ratio reports, the

A.M. Best Report, the Company’s independent audit reports and certain work papers prepared by

the Company’s independent certified public accountant (CPA) and other reports as considered

necessary were reviewed and utilized where applicable within the scope of this examination.

This report of examination was confined to financial statements and comments on matters that

involved departures from laws, regulations or rules, or which were deemed to require special

explanation or description.

Status of Adverse Findings from Prior Examination

The following is a summary of significant adverse findings contained in the Office’s prior

examination report as of December 31, 2003, along with resulting action taken by the Company

in connection therewith.

3

Corporate Records

The Company was unable to produce a signed copy of the minutes of the 2001 Annual

Shareholders meeting. Resolution: The minutes to the 2007 Annual Shareholders meeting

was appropriately signed by the Directors and in compliance with Section 607.1601, Florida

Statute.

Information Technology (IT)

The Ohio Department of Insurance performed an evaluation of the information technology and

computer systems of the Company. Resolution: Results of the evaluation were provided in a

report to the Company.

HISTORY

General

The Company was incorporated on August 12, 1994, under the laws of the State of Florida, as a

stock property and casualty insurer, a wholly-owned subsidiary of PC Investment Company (the

Parent). The parent was a wholly-owned subsidiary of Progressive Casualty Insurance

Company, an Ohio domiciled insurance company. Effective March 21, 1997, ownership of the

Company was transferred to The Progressive Corporation. Effective January 1, 2005,

ownership of the Company was transferred to Progressive Commercial Holdings, Inc., a

Delaware corporation and wholly-owned subsidiary of The Progressive Corporation.

In accordance with Section 624.401(1), Florida Statutes, the Company was authorized to transact

the following insurance coverage in Florida on December 31, 2007:

4

Inland Marine Homeowners Multi-Peril (reinsurance only)

Other Liability Medical Malpractice

(reinsurance only)

Private Passenger Auto Liability Earthquake (reinsurance only)

Commercial Automobile Liability Fidelity

(reinsurance only)

Private Passenger Auto Physical Damage Surety (reinsurance only)

Commercial Auto Physical Damage

The Articles of Incorporation were not amended during the period covered by this examination.

Capital Stock

As of December 31, 2007, the Company’s capitalization was as follows:

Number of authorized common capital shares 50,000 Number of shares issued and outstanding 10,000 Total common capital stock $1,000,000 Par value per share $100.00

Profitability of Company

The following table shows the profitability trend (in dollars) of the Company for the period of

operations, as reported in the filed annual statements.

5

2007 2006 2005 2004 Premiums Earned 60,647,078 66,693,501 62,422,419 65,182,735

Net Underwriting Gain/(Loss) 3,030,249 11,556,081 4,633,832 3,678,078

Net Income 5,878,436 10,202,045 6,149,280 6,670,178

Total Assets 306,327,048 344,913,405 371,635,935 354,172,172

Total Liabilities 214,636,017 249,224,668 285,465,014 272,757,673

Surplus As Regards Policyholders

91,691,031 95,688,737 86,170,921 81,414,499

Dividends to Stockholders

In accordance with Section 628.371, Florida Statutes, the Company declared an ordinary dividend

in 2007 to its stockholders in the amount of $9,500,000 which was paid on January 3, 2008. The

Company declared and paid extraordinary dividends to its stockholder in 2005 and 2004 in the

amounts of $2,000,000 and $7,000,000, respectively. The Company did not declare a cash

dividend in 2006.

Management

The annual shareholder meeting for the election of directors was held in accordance with Sections

607.1601 and 628.231, Florida Statutes. Directors serving as of December 31, 2007, were:

Directors

Name and Location Principal Occupation

Patricia O. Bemer Highland Heights, Ohio

Progressive Insurance Group HR Business Leader

Stephen D. Peterson Bay Village, Ohio

Progressive Express Insurance Company Treasurer

6

Karen L Palmer North Royalton, Ohio

Progressive Express Insurance Company Vice President

William R. Kampf Moreland Hills, Ohio

Progressive Insurance Group Commercial Auto Marketing General Manager

Michael J. Miller Rocky River, Ohio

Progressive Insurance Group Commercial Auto Marketing Regional Manager

The Board of Directors in accordance with the Company’s bylaws appointed the following senior

officers:

Senior Officers

Name Title

William Raymond Kampf President Stephen David Peterson Treasurer Patricia Mitchell Corwin Secretary Michael John Miller Vice President Sandra Lee Rihvalsky Vice President Karen Lynne Palmer Vice President Margaret Ann Rose Assistant Secretary Eric J. Steiner Assistant Vice President

The Company’s board appointed several internal committees in accordance with Section

607.0825 Florida Statutes. Following were the principal internal board committees and their

members as of December 31, 2007:

Executive Committee Investment Committee

William R. Kampf* Stepen D. Peterson*

Michael J. Miller William R. Kampf

Karen L. Palmer** Michael J. Miller

Stephen D. Peterson Karen L. Palmer**

* Chairman ** Not employed at the Company after December 31, 2007

7

Conflict of Interest Procedure

The Company adopted a policy statement requiring annual disclosure of conflicts of interest in

accordance with the NAIC Financial Condition Examiners Handbook.

Corporate Records

The recorded minutes of the shareholder, Board of Directors, and certain internal committees

were reviewed for the period under examination. The minutes of the Board adequately

documented meetings and approval of Company transactions and events in accordance with

Section 607.1601, Florida Statutes, including the authorization of investments as required by

Section 625.304, Florida Statutes.

Acquisitions, Mergers, Disposals, Dissolutions, and Purchase or Sales through

Reinsurance

There were no acquisitions, mergers, disposals, dissolutions and purchase or sales through

reinsurance during the period under review.

Surplus Debentures

The Company did not issue any surplus debentures during the period under review nor does it

have any surplus debentures outstanding.

AFFILIATED COMPANIES

The Company was a member of an insurance holding company system as defined by Rule

69O-143.045(3), Florida Administrative Code. The latest holding company registration

statement was filed with the State of Florida on March 30, 2009, as required by Section

8

628.801, Florida Statute and Rule 690-143.046, Florida Administrative Code. The Company

was indirectly a wholly owned subsidiary of the Corporation, an insurance holding company

formed in 1965. Various inter-company agreements were in effect at December 31, 2007,

which provided for the centralized cash and investment management systems.

A simplified organizational chart as of December 31, 2007, reflecting the holding company

system, is shown below. Schedule Y of the Company’s 2007 annual statement provided a list of

all related companies of the holding company group.

PROGRESSIVE AMERICAN INSURANCE COMPANY ORGANIZATIONAL CHART

DECEMBER 31, 2007

THE PROGRESSIVE CORPORATION

(A publicly traded Ohio Corporation)

PROGRESSIVE COMMERCIAL HOLDINGS,

INC. 100%

PROGRESSIVE EXPRESS INSURANCE COMPANY

9

The following agreements were in effect between the Company and its affiliates:

Cash Management Agreement

This agreement, effective January 1, 1998, provided for the Company’s participation in the

Progressive Casualty Insurance Company’s central cash management system (cashier account) in

which all the cash of the Parent’s system’s companies were deposited. Pursuant to the agreement,

Progressive Casualty Insurance Company was responsible in a fiduciary capacity for the

Company’s cash, and performed all the Company’s duties and operations as they pertain to cash,

including the payment of the Company’s obligations.

Interest Agreement

The Company became a participant to the existing interest agreement effective November 25,

1985 with members of the holding company system. Pursuant to the agreement, the Company

agreed to pay interest or to receive interest income from Progressive Casualty Insurance Company

for any balances owed to or owed by Progressive Casualty Insurance Company as a result of the

activity in the cashier account as stated in the cash management agreement.

Investment Services Agreement

Progressive Capital Management Corp. provided investment management services to the

Company as well as other affiliated members. Costs of the investment services were shared

among the members of the holding company system.

10

Joint Servicing (Cost Allocation) Agreement

This agreement provided that United Financial Casualty Company would provide certain services

and facilities directly or may cause or engage another party, which may be an affiliate, to provide

such services.

Allocation of Federal Income Taxes

The Company and other members of its holding company system entered into an income tax

sharing agreement with the Corporation, whereby the companies filed a consolidated federal

income tax return. Taxes were computed for each entity on a stand alone basis.

11

FIDELITY BOND AND OTHER INSURANCE

The Progressive Group of Companies maintained aggregate fidelity bond coverage of

$50,000,000, with a single loss limit of $25,000,000 and a deductible of $1,000,000, which

adequately covered the suggested minimum amount of coverage for the Company as

recommended by the NAIC.

The Company also maintained insurance coverage through a Commercial General Liability policy,

a Garage Liability policy, an Excess Liability policy, a Commercial Property policy, a Commercial

Auto policy and a Claims-Made Professional Liability insurance policy. All policies were in the

name of The Progressive Corporation and all of its subsidiaries and affiliates.

PENSION, STOCK OWNERSHIP AND INSURANCE PLANS

The Company was one of the companies in the Progressive Group that retained employees. The

Company participated in benefit plans offered by the Corporation but had no legal obligation or

direct liability for expenses in certain benefit plans. Member companies were allocated employee

benefit expense based upon product lines and employee services, through the cost allocation

agreement. Health, dental and long-term disability plans, as well as pre-paid medical and child

care programs, were offered to employees. The Group had a two tiered retirement program. The

first tier was a defined contribution pension plan covering all employees who met age and length of

service requirements. The second tier was a long term savings plan under which the Corporation

matched amounts contributed to the plan by an employee up to a maximum of 3% of the

employee’s eligible compensation.

12

STATUTORY DEPOSITS

The following securities were deposited with the State of Florida as required by Section 624.411,

Florida Statutes, and with various state officials as required or permitted by law:

Par Market State Description Value Value

FL USTNT, 5.0% 02/05/11 $ 365,768 $380,167

TOTAL SPECIAL DEPOSITS $ 365,768 $380,167

INSURANCE PRODUCTS

The Company was an indirect subsidiary of the Corporation, a holding company that had

insurance and non-insurance subsidiaries and one mutual insurance company affiliate. The

Corporation did not have revenue producing operations of its own.

The Company and the affiliated Progressive Insurance Companies (Group) wrote primarily

private passenger automobile coverages, specialty coverages (motorcycles) and commercial

automobile coverages.

Territory

The Company was authorized to transact insurance in the following states:

Florida Georgia California

13

Treatment of Policyholders

The Company established procedures for handling written complaints in accordance with Section

626.9541(1)(j), Florida Statutes.

The Company maintained a claims procedure manual that included detailed procedures for

handling each type of claim in accordance with Section 626.9541(1) (i) 3a, Florida Statutes.

REINSURANCE

The reinsurance agreements reviewed complied with NAIC standards with respect to the standard

insolvency clause, arbitration clause, transfer of risk, reporting and settlement information

deadlines.

Assumed

The Company did not assume risk through reinsurance.

Ceded

The Company ceded 90% of its direct written risk to its affiliate, United Financial Casualty

Company, in a quota share contract. Other immaterial amounts were ceded to several non-

affiliated reinsurers.

The reinsurance contracts were reviewed by the Company’s appointed actuary and were utilized in

determining the ultimate loss opinion.

14

ACCOUNTS AND RECORDS

The Company maintained its principal operational offices in Mayfield Village, Ohio, where this

examination was conducted.

An independent CPA audited the Company’s statutory basis financial statements annually for the

years 2004 through 2007, in accordance with Section 624.424(8), Florida Statutes. Supporting

work papers were prepared by the CPA as required by Rule 69O-137.002, Florida Administrative

Code.

The Company’s accounting records were maintained on a computerized system. The Company’s

balance sheet accounts were verified with the line items of the annual statement submitted to the

Office.

The Company and primary non-affiliates had the following agreements:

Custodial Agreement

The Company maintained a custodial agreement with Citibank, N.A. for the purpose of safekeeping

its investment securities. The agreement met the requirements of Rule 69O-143.042, Florida

Administrative Code.

Independent Auditor Agreement

The Company maintained a contract with PricewaterhouseCoopers (PwC) for the purpose of

conducting statutory and GAAP audits and preparing certified statutory financial statements.

15

Information Technology (IT)

The Ohio Department of Insurance performed an evaluation of the information technology and

computer systems of the Company. Results of the evaluation were noted in the Information

Technology Report provided to the Company.

FINANCIAL STATEMENTS PER EXAMINATION

The following pages contain financial statements showing the Company’s financial position as of

December 31, 2007, and the results of its operations for the year then ended as determined by this

examination. Adjustments made as a result of the examination are noted in the section of this

report captioned, “Comparative Analysis of Changes in Surplus.”

16

PROGRESSIVE EXPRESS INSURANCE COMPANY Assets

DECEMBER 31, 2007

Per Company Examination Per ExaminationAdjustments

Bonds $65,522,569 $65,522,569Cash: 0 0Investment income due and accrued 949,413 949,413Premiums and considerations: Uncollected premiums and agents' balances 17,147,585 17,147,585 Deferred premiums, agents' balances 108,084,970 108,084,970Reinsurance recoverable 108,669,678 108,669,678Net deferred tax asset 3,704,586 3,704,586Aggregate write-in for other than invested assets 2,248,247 2,248,247

Totals $306,327,048 $0 $306,327,048

17

PROGRESSIVE EXPRESS INSURANCE COMPANY Liabilities, Surplus and Other Funds

DECEMBER 31, 2007

Per Company Examination PerAdjustments Examination

Losses $27,196,851 $27,196,851

Loss adjustment expenses 6,581,906 6,581,906

Commissions payable 957,973 957,973

Other expenses 143,758 143,758

Taxes, licenses and fees 1,771,034 1,771,034

Current federal and foreign income taxes 136,429 136,429

Unearned premium 23,208,851 23,208,851

Advance premiums 5,029,284 5,029,284

Dividends to stockholders 9,500,000 9,500,000

Ceded reinsurance premiums payable 87,635,068 87,635,068

Drafts outstanding 40,418,445 40,418,445

Payable to parent, subsidiaries and affiliiates 3,746,703 3,746,703

Aggregate write-ins for liabilities 8,309,715 8,309,715

Total Liabilities $214,636,017 $0 $214,636,017

Common capital stock $1,000,000 $500,000

Gross paid in and contributed surplus 80,889,690 1,200,000

Unassigned funds (surplus) 9,801,341 4,564,923

Surplus as regards policyholders $91,691,031 $91,691,031

Total liabilities, surplus and other funds $306,327,048 $0 $306,327,048

18

PROGRESSIVE EXPRESS INSURANCE COMPANY Statement of Income

DECEMBER 31, 2007

Underwriting Income

Premiums earned $60,647,078Deductions:

Losses incurred 40,329,143Loss expenses incurred 6,625,735Other underwriting expenses incurred 10,661,951Aggregate write-ins for underwriting deductions 0Total underwriting deductions $57,616,829

Net underwriting gain or (loss) $3,030,249

Investment Income

Net investment income earned $2,703,496Net realized capital gains or (losses) 281,263Net investment gain or (loss) $2,984,759

Other Income

Net gain or (loss) from agents' or premium balances charged off ($432,195)Finance and service charges not included in premiums 4,738,802Aggregate write-ins for miscellaneous income (3,182,119)Total other income $1,124,488

Net income before dividends to policyholders and before federal & foreign income taxes $7,139,496Dividends to policyholders 0Net Income, after dividends to policyholders, but before federal & foreign income taxes $7,139,496Federal & foreign income taxes 1,261,060

Net Income $5,878,436

Capital and Surplus Account

Surplus as regards policyholders, December 31 prior year $95,688,737

Net Income $5,878,436Change in net deferred income tax (396,880)Change in non-admitted assets 20,738Change in provision for reinsurance 0Change in excess statutory over statement reserves 0Surplus adjustments: Paid in 0Dividends to stockholders (9,500,000)Aggregate write-ins for gains and losses in surplus 0Examination Adjustment 0Change in surplus as regards policyholders for the year ($3,997,706)

Surplus as regards policyholders, December 31 current year $91,691,031

19

COMMENTS ON FINANCIAL STATEMENTS

Assets

Bonds $65,522,569 Bonds reported as $65,522,569, were a significant decrease of $12,603,069 and sixteen

percent over the 2006 reported bond amount.

Liabilities

Losses and Loss Adjustment Expenses $33,778,757 An outside actuarial firm appointed by the Board of Directors, rendered an opinion that the

amounts carried in the balance sheet as of December 31, 2007, made a reasonable provision for

all unpaid loss and loss expense obligations of the Company under the terms of its policies and

agreements.

The Ohio Department of Insurance actuary reviewed work papers provided by the Company and

was in concurrence with this opinion.

Capital and Surplus $91,691,031

The amount reported by the Company of $91,691,031, exceeded the minimum requirements of

ten percent of liabilities, $21,463,602, as required by Section 624.408, Florida Statutes.

20

A comparative analysis of changes in surplus is shown below.

PROGRESSIVE EXPRESS INSURANCE COMPANY COMPARATIVE ANALYSIS OF CHANGES IN SURPLUS

DECEMBER 31, 2007 The following is a reconciliation of Surplus as regardspolicyholders between that reported by the Company andas determined by the examination.

Surplus as Regards PolicyholdersDecember 31, 2007, per Annual Statement $91,691,031

INCREASEPER PER (DECREASE)

COMPANY EXAM IN SURPLUS

ASSETS: No adjustment

LIABILITIES: No adjustment

Net Change in Surplus: 0

Surplus as Regards PolicyholdersDecember 31, 2007, Per Examination $91,691,031

21

SUMMARY OF FINDINGS

Compliance with previous directives

There were no material findings or corrective actions to be taken with regard to the previous

examination report as of December 31, 2003.

Current examination comments and corrective action

There are no exceptions or findings in the examination as of December 31, 2007.

22

CONCLUSION

The insurance examination practices and procedures as promulgated by the NAIC have been

followed in ascertaining the financial condition of Progressive Express Insurance Company

as of December 31, 2007, consistent with the insurance laws of the State of Florida.

Per examination findings, the Company’s Surplus as regards policyholders was $91,691,031

and in compliance with Section 624.408, Florida Statutes.

In addition to the undersigned, Kethessa Carpenter, CPA, Financial Examiner/Analyst

Supervisor, Frank Jones, Reinsurance/Financial Specialist and the financial examiners

assigned from the Ohio Department of Insurance, participated in the examination.

Respectfully submitted, ___________________________ Richard Shaffer Financial Specialist Florida Office of Insurance Regulation ___________________________ Mary M. James, CFE, CPM Chief Examiner Florida Office of Insurance Regulation